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Wealth Insights - HSBC TW
Market Outlook
Your guide to the global investment landscape

Willem Sels

Global Chief Investment Officer, HSBC Global Private Banking and Wealth

Navigating a complex world through quality assets and structural opportunities

The financial markets have experienced another eventful year, from the collapse of Silicon Valley Bank in the first quarter to the geopolitical conflict in the Middle East in October. Moreover, central banks’ aggressive rate hikes have sent bond yields to multi-year highs and made financial conditions more challenging.

As we look ahead to 2024, we see two positive drivers on the horizon. The number one challenge of rate hikes in major economies is finally fading away. The other positive is that the US economy appears to be heading for a soft landing, mitigating the risk of a global recession. These developments should allow financial markets to breathe a sigh of relief.

However, Europe is teetering on the brink of recession and China’s property sector will continue to weigh on global economic growth, while lingering geopolitical tensions and a busy election calendar in 2024 promise further bouts of market volatility. What should investors do in this complex environment?

Positioning for a mild acceleration of growth in the second half of 2024

Although global growth will be relatively slow, it remains positive with a full-year GDP growth forecast of 2.3% for 2024. In fact, we expect a mild acceleration in the second half of 2024 because falling inflation should help drive consumption, while the expectation of rate cuts led by the US in Q3 2024 should support investment and boost margins. What’s more, we see long-term structural trends turning into attractive opportunities.

Setting sail on the right course

Bond yields remain at attractive levels but tight financial conditions, slow growth and heightened geopolitical risks have led us to maintain our preference for high-quality bonds. What has changed from the last quarter is that government bonds of medium-to-long duration in developed markets look more attractive, as do Indian local currency bonds given their compelling yields, diversification benefits and India’s growth prospects.

In the equity market, we prefer quality large-cap companies because they can generally withstand higher rates and market uncertainty better. Earnings potential will become a key metric for stock selection. Geographically, the US offers solid fundamentals and structural opportunities, such as the re-industrialisation trend and rapid innovation. That should allow companies in the technology, industrials, consumer discretionary and healthcare sectors to surprise positively on earnings.

In Asia, growth momentum in India and Indonesia remains strong. In addition, we expect earnings in the Asian tech sector to bottom out soon, and South Korea should see a broad-based recovery in 2024 as the global tech cycle improves.

Sustainability remains an important theme for investors, especially with the UN Climate Change Conference (COP 28) turning the spotlight on the need for more global collaboration to address climate change. With ongoing investment in renewable energy and biodiversity, and continued improvement in ESG governance, companies that can take advantage of these developments will be well-placed for long-term outperformance.

A focus on quality and fundamentals has served us well in 2023 and we feel the same will be true going into next year. But we see many opportunities that we want to capture and believe that the beginning of the year is always a good time to review your portfolio. We hope our investment themes will help you achieve your investment and protection goals.

Best wishes for a successful investment journey in 2024.

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Investment themes

We believe central bank pauses will lead to a rate plateau, with the US Federal Reserve likely to start cutting in Q3 2024 and the European Central Bank and the Bank of England following later. Amid a high-for-longer rate environment and slow growth in developed markets, we favour investment grade bonds as they’re better able to navigate tight financial conditions and heightened geopolitical risks.

Solid US economic data and concerns over increased issuance of US Treasuries to fund the government deficit have pushed up yields for long maturities and made their valuations more attractive. We’ve therefore extended our duration positioning across developed market government bonds to medium-to-long in order to lock in attractive yields before they come down.

Indian bonds, ranging from government and quasi-sovereign bonds to high-quality credit, are another bright spot given India’s solid economic growth and stable currency outlook. The inclusion of Indian bonds in a key global emerging markets benchmark index is expected to attract an influx of USD20 billion, supporting bond valuations. In addition to offering more compelling yields than their counterparts in most developed and emerging markets, Indian bonds provide investors with access to a relatively uncorrelated and large emerging market.

We look to longer maturities of up to 7-10 years in US Treasuries and UK gilts. For corporate bonds, we maintain our preference for investment grade credit and maturities of 5-7 years. 
We favour Indian local currency bonds for yield enhancement and diversification.

The US economy is more resilient than most other markets, and that should remain the case in 2024 thanks to cooling inflation and the end of rate hikes. These trends support equity valuations and improve companies’ profit margins. S&P 500 company earnings are projected to rise by 5.3% y-o-y in Q4 2023 and 12% y-o-y in 2024. As a result of these tailwinds, US equities remain our biggest portfolio overweight, while Europe is yet to see a rebound.

Fundamentally, we remain bullish on Asia but the divergence in growth has led us to favour India and Indonesia above all. Both enjoy a positive structural growth outlook, favourable demographics and strong domestic consumption. India has been one of the best performing equity markets in 2023 with strong GDP and earnings growth expectations. Indonesia remains our top pick in the ASEAN region, given its attractive valuations, improving balance sheets and robust capex growth, reflecting stronger corporate confidence. South Korea should perform well as the global tech cycle improves.

Overall, we prefer quality large-cap companies with strong balance sheets and low debt levels. We believe they can deliver on or even exceed earnings expectations amid a global growth slowdown and market uncertainty.

We continue to prefer US over European stocks and overweight Asia ex Japan equities, particularly India, Indonesia and South Korea. 
In Latin America, Mexico is benefitting from US re-onshoring activities, while Brazil offers attractive equity valuations.

Structural shifts in the US are turning into long-term opportunities. The technology revolution and AI-related developments should help create new business models, boost productivity and increase the return on invested capital. The theme of the re-industrialisation of North America is also set to benefit manufacturing and job creation, while US consumption is well supported by a strong labour market and falling inflation as disposable income rises.

We expect US economic resilience to provide support for a broader range of sectors. Innovation in US healthcare will be a key driver in reducing costs and creating demand for new products and services. Geopolitical tensions could put upward pressure on energy prices, making energy stocks a good hedge against oil supply and geopolitical risks. As technology, healthcare and consumer discretionary are expected to deliver close to an 18% rise in earnings per share in 2024, we believe a tilt towards cyclical sectors mixed with value exposure will help investors capture diverse sources of growth while mitigating short-term volatility.

Elsewhere, we’re more defensive in Europe and see opportunities in healthcare driven by a boost in sentiment and sales expectations around new pharmaceutical products. Asia also offers pockets of secular growth because of its huge population and leadership position in e-commerce and semiconductor manufacturing.

We like technology and energy in all regions and favour consumer discretionary, financials, industrials and healthcare (US and global). 
We favour both consumer discretionary and staples, as well as communications services in Asia, and healthcare in Europe.

Momentum is building towards a sustainable future driven by green technology, rising global investment in and demand for sustainable solutions, and continued improvement in ESG governance. Renewable energy remains an area of huge attention both socially and commercially, with investment in this sector reaching USD334.5 billion in H1 2023, up 14% y-o-y1. Europe is a big investor in renewable energy, with Southeast Asia, India, China and Australia also ramping up their efforts to support the build-out of clean energy capacity.

Biodiversity investment is also gaining prominence, with the Kunming-Montreal Global Biodiversity Framework in late 2022 setting new goals to conserve land and oceans by 2030. Its implementation is being financed by a USD1.4 billion global biodiversity fund for developing countries.

Climate talks will resume against a backdrop of extreme weather events and a renewed focus on achieving the net zero transition at the next UN Climate Change Conference (COP 28) in the UAE.

This will mark the conclusion of the first-ever global stocktake, which assesses progress towards the 2015 Paris Agreement goals. In areas where governments fail to deliver on these objectives, we think companies, consumers, cities and investors can provide a powerful impetus for progress.

Integrating sustainability in investment processes is becoming a global trend in the finance industry. Companies and sectors that can take advantage of the ESG developments will be potential long-term winners.

Renewable energy, including wind, solar and biofuels, continues to gain investment traction.
Investing in biodiversity presents cross-sector opportunities, such as technological innovation.

Regional market outlook

The US economy remains resilient thanks to a strong labour market, while falling inflation is leaving households with more money to spend. Government stimulus programmes are bringing manufacturing and research & development back. Moves like this should support activity in areas like healthcare, engineering and robotics, which are being further boosted by advances in AI. All of this should help counter the headwind of high interest rates, as shown by the outperformance of US stocks against other markets in 2023. We think high-quality USD bonds are attractive as the Fed appears to have completed this cycle of interest rate hikes and is likely to start cutting in Q3 2024.

Eurozone countries are either in recession or close to it and the region’s high interest rates, volatile energy prices and proximity to the wars in the Middle East and Ukraine may continue to weigh on sentiment. Hence, we prefer the US equity market over the Eurozone. The UK equity market is also somewhat better placed than that of continental Europe due to its larger energy exposure and lower valuations. Both the UK and the Eurozone will probably need to wait longer than the US to make rate cuts since inflation is proving stickier.

EM EMEA economies are facing significant headwinds because of their proximity to the devastating wars in the Middle East and Ukraine and Europe’s slow growth rate. Despite geopolitical uncertainty, oil prices have stayed below recent highs thanks to slower global growth. Turkey’s recent switch to a more conventional monetary policy, however, has led to a partial recovery in risk appetite.

Latin America’s interest rate cycle is ahead of the US with rate cuts now well under way, which should support the region’s stock and bond markets. Moreover, US companies continue to diversify their supply chains, and trade with Mexico in particular continues to grow.

We maintain a neutral view on the mainland Chinese and Hong Kong equity markets despite their very low valuations as we think the Chinese property sector will be an obstacle to the material acceleration of economic growth and earnings. We see more positive cyclical and structural growth in both India and Indonesia, with the former benefitting from a vibrant startup ecosystem and the latter well placed in the net zero transition as an important player in the electric vehicle supply chain. Both countries, and the ASEAN region as a whole, are attracting foreign investment linked to the supply chain diversification.

The Japanese equity market has had a strong run in 2023 to date, but largely as a result of JPY weakness, and the return in USD has not been that strong. Markets continue to second-guess the Bank of Japan’s monetary policy, which has changed several times and seems to reflect only a very reluctant tightening stance. As a result, volatility of JPY, stocks and bonds may remain elevated in 2024. With high valuations and institutional investors already heavily allocated to the market, we think upside is becoming more limited.

Notes: The above comments reflects a 6-month view (relatively short-term) on asset classes for a tactical asset allocation. For a full listing of HSBC’s house view on asset classes and sectors, please refer to our Investment Monthly issued at the beginning of each month.

↑ “Overweight” implies a positive tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio.

↓ “Underweight” implies a negative tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio.

↔ “Neutral” implies neither a particularly negative nor a positive tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio.

Key data to watch

Source: HSBC Global Research as at 17 November 2023. Estimates and forecasts are subject to change. India inflation forecasts are fiscal year.

Source: Refinitiv, HSBC Global Private Banking as at 21 November 2023. Past performance is not a reliable indicator of future performance. Forecasts are subject to change.

Source: Bloomberg, HSBC Global Private Banking as at 1 November 2023. Past performance is not a reliable indicator of future performance.

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Think Future 2024: Your guide to the global investment landscape

Navigating a complex world through quality assets and structural opportunities

Investment themes

1. Optimise bond returns with quality and duration

2. Focus on large-cap stocks with attractive earnings potential

3. Exploit opportunities from a broad range of sectors

4. Integrate sustainability to capture green potential

Regional market outlook

United States ↑

↓ Eurozone ↔ UK

↓ EM EMEA ↑ EM Latin America

Asia (ex Japan) ↑

Japan ↔

Key data to watch

We expect economic growth in the West should bottom in Q1, followed by a mild acceleration

Valuations look more attractive for 2024 across markets and sectors, which are positive for equities

Although growth is low by historical standards, we foresee better growth in H2

Related Insights

Investment Outlook: HSBC Perspectives Q4 2023

Investment Outlook: Think Future 2023 Mid-year Edition

ASEAN in Focus: The big inflation reversal

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